Naira still struggling to converge between NAFEX, official rates

Naira is still struggling to converge between the Central Bank of Nigeria (CBN)’s Nigeria Autonomous Foreign Exchange Market (NAFEX) trading market and the official rates, National Daily has gathered.

The CBN had sold more than $4 billion from February to May to narrow the gap between the official and black market exchange rates. But with reserves of just over $30 billion, it is doubtful it can keep selling at such a pace.

The apex had in April set up NAFEX for foreigners in late April which allows investors and traders to swap Naira for the Dollar at market-determined rates.

While the naira is trading at about 315 against the U.S. currency in the official market, the exchange rate at NAFEX dropped to N361.86 per dollar from N365.02 per dollar in June.

The naira also dropped a point against the Dollar yesterday, Monday July 24 at the parallel market, exchanging for N367 per Dollar from the N366 it exchanged for last Friday.

Meanwhile, transactions at the Nigeria Autonomous Foreign Exchange Market (NAFEX) window have reached $3.8 billion since its introduction in April.

National Daily gathered from dealers that there have been continuous improvements in dollar inflow into the NAFEX from foreign investors due to increased confidence in the window.

For example the volume of dollars traded in last market increased to $407 million last week from $354.8 million in June.

Acting Director, Corporate Communications Department, CBN, Mr. Isaac Okoroafor confirmed this saying the apex bank offered $100million to dealers in the wholesale segment, while it allocated $23 million to the Small and Medium Enterprises (SMEs) segment.

He said that those requiring foreign exchange for invisibles such as tuition fees, medical payments and Basic Travel Allowance (BTA) received $19.5 million.

The new window has re-opened the doors to the carry trade in naira – one of the few such opportunities on the continent outside South Africa, said Yvette Babb, executive director for sub-Saharan Africa research and strategy at J.P Morgan.

Babb estimates foreign portfolio outflows from Nigeria were around $6 billion last year, but added: “Depressed equity prices and high local currency yields in combination with the exchange rate adjustment is likely to give rise to further foreign portfolio inflows.”

But NAFEX still has plenty of critics. Investors are worried by authorities’ failure to guarantee that the window will remain available in future, especially in the event of another sharp decline in oil prices.

“In the case of oil production coming down again, it is not clear that the currency will adjust and you could go back to a position where the market goes completely illiquid again,” Emso’s Weeks said.